Pritzker Scion Backs Pot Plans as Getting High Gets Legal

Investment interest in the marijuana industry has surged since Colorado and Washington voters in 2012 legalized sales to anyone 21 and older. Photographer: Matthew Staver/Bloomberg

Jan. 13 (Bloomberg) -- Robert Frichtel will have 10 minutes
to persuade a roomful of investors in Las Vegas to part with as
much as $6 million for a business leasing space for growing
marijuana.

Frichtel’s firm will be among 12 companies making pitches
Jan. 23 to as many as 70 angel investors assembled by the
ArcView Group, based in San Francisco. Members include Joby
Pritzker, whose family started Hyatt Hotels Corp., and Adam
Wiggins, co-founder of Heroku Inc., a software maker acquired by
Salesforce.com Inc.

“Everybody is running toward this as the next
entrepreneurial wave -- the green rush,” said Frichtel, 50,
president and chief executive officer of Advanced Cannabis
Solutions Inc., based in Colorado Springs, Colorado.

Investment interest in the marijuana industry has surged
since Colorado and Washington voters in 2012 legalized sales to
anyone 21 and older. Long lines formed when Colorado retail
shops opened Jan. 1. Twenty states, including California and
Massachusetts, now allow the medical use of marijuana. New York
may be next under a plan announced by Governor Andrew Cuomo.

“Every day, more and more people realize that cannabis
will be legal and that it will be the next great American
industry, and so they’re placing their bets,” Troy Dayton,
ArcView’s CEO, said in an interview at his home office in a
three-bedroom apartment in Emeryville, California, near Oakland.

“Anything that you have for any other product, you’re
going to see for cannabis,” said Dayton, 36, a native of
Hillsborough, New Jersey. “The question is when, how and who.
The who is largely being decided right now.”

Rising Market

Prospects for legalization of marijuana are also
galvanizing stock market investors. While regulators warn of
scams, some of the biggest percentage gains in the market this
year are being harvested by investors speculating on marijuana
penny stocks. GreenGro Technologies Inc., which provides
management services for medical dispensaries, has soared 409
percent to 22 cents after touching 80 cents Jan. 8.

Advanced Cannabis climbed 105 percent to $6.65 this year
from $3.25. The company reported a $472,000 loss on $455 in
sales in the quarter ending Sept. 30.

The Financial Industry Regulatory Authority issued an alert
in August saying investors should beware of potentially
fraudulent purveyors of stocks connected to pot and related
services. Scammers may be promoting the shares, then selling
them in what’s called a “pump-and-dump” scheme, the brokerage
watchdog organization said in a statement. It didn’t name any
companies.

Accredited Investors

In ArcView’s network, the number of accredited investors
has grown to about 110 from about 20 a year ago, Dayton
said. Members, who include Republican New York Assemblyman Steve
Katz, pay a $3,500 annual fee and the company seeks investors
who can put at least $50,000 into the industry in the next year,
he said.

ArcView did six times more business last year than in 2012,
Dayton said, declining to provide revenue figures. ArcView projects
the U.S. marijuana market that’s legal under state law will grow
to $2.34 billion this year.

Support for legalizing marijuana reached a majority among
Americans last year for the first time, at 58 percent, according
to a Gallup poll based on telephone interviews with 1,028 adults
and released in October.

Prosecution Threat

Investor interest is increasing as the threat of
prosecution wanes. While federal law still classifies marijuana
as an illegal substance, the U.S. Justice Department said in
August that it wouldn’t challenge the legalization laws in
Washington and Colorado, provided the states prevent out-of-state distribution, access to minors and drugged driving, among
other things.

Mark A.R. Kleiman, a professor of public policy at the
University of California at Los Angeles, said a federal
crackdown on marijuana-related businesses “would be the least
of my worries.”

“I just don’t see how there’s money to be made producing
an agricultural commodity,” he said in an interview. “Once
this is a competitive market, prices will be driven down to the
level of costs. Costs for cannabis are very small, if it’s
produced legally.”

‘Ancillary’ Businesses

While some investors are starting to feel more at ease
about investing directly in marijuana businesses, many are
sticking with so-called ancillary companies with less risk of
tangling with the federal government, such as security
equipment, mobile applications and advertising.

Among them is MassRoots Inc., a Denver-based company that
last year released a free mobile app that enables users to share
photos of their weed use, similar to photo-sharing service
Instagram Inc.

Isaac Dietrich, MassRoots’s co-founder and CEO, said he
secured $150,000 from three investors after pitching at an
ArcView meeting in Denver last year. His app has 30,000 monthly
active users, he said.

“We’re still exploring exactly how to monetize the app,”
said Dietrich, 21. “We’re getting people to use the app on a
daily basis. As people use it more and more and our network
grows, then we’ll start focusing on advertising.”

Justin Hartfield said he started Emerald Ocean Capital LP,
a Newport Beach, California-based marijuana private-equity firm,
in March “to take advantage of the changing cannabis laws.”

Weed Mapper

“It was only last year when we started getting inquiries
from investors, from entrepreneurs, from existing businesses
that they wanted to expand, or they wanted to get into this
space,” said Hartfield, 30, CEO of Emerald Ocean and
WeedMaps.com, a marijuana dispensary location website that
started in 2007.

His firm plans to raise about $10 million by the end of the
first quarter to invest only in ancillary businesses “that
don’t directly touch the sun,” Hartfield said.

Jim Willett, a retired business owner from Woodinville,
Washington, said he has invested more than $1 million since
joining ArcView in December 2012.

His investments include a Denver-based marijuana grower and
store, Kansas City, Missouri-based Agrisoft Development Group,
which sells software that allows marijuana businesses to comply
with regulations for tracking their product from seed to sale,
and Canna Security America, a Denver-based security equipment
company for pot businesses.

“I’m looking for companies that are already established,”
said Willett, 63, who plans to attend the pitch meeting in Las
Vegas. “Something that will be desirable wherever marijuana is
made legal.”

Willett said that when he was a Navy pilot, he monitored
the California coast for freighters smuggling marijuana from
Mexico and South America.

“I’ve never smoked marijuana,” Willett said. “I’m no
crusader. I’m in it for the money.”